Earlier in the week came distressing news from many manufacturers of PC components and now Intel has made their financial state a little clearer. The Register has posted the numbers, predicted earnings for Q1 of this year have dropped from USD13.7 billion +/- $500 million, down to USD12.8bn +/- $300 million. Losing about a billion dollars in profit is going to hurt anyone, even the mighty Intel. The drop in the PC market comes from a variety of sources but two of the most likely candidates are the lack of cash in consumers pockets to upgrade and a lack of competition driving an urge to upgrade. Once many gamers would willing live on ramen noodles for a time so that they could afford the next GPU or CPU upgrade thanks to the impressive performance increases the next generation offered. Now new releases tend to offer a small incremental performance increase and occasionally new features which are impressive but nowhere near what an upgrade 10 years ago offered. Certainly part of the issue is the difficult of coaxing a bit more performance out of silicon and with the reduced competition it is less financially attractive to fund expensive and risky R&D projects than it is to work on small incremental increases in efficiency and performance.

Here's hoping for a change to this market in the coming years.

"Intel has lowered its revenue forecast for the first quarter of its fiscal 2015 by nearly a billion dollars, citing a weaker than expected PC market."

Guess what? Intel made money. A lot of money. This is not surprising. The results were not record breaking, but they did beat expectations. Intel had a gross revenue of $12.9 billion for the quarter, with a net income of $2.7 billion. Gross margins decreased (slightly) to 64%, but the reasons for this are pretty logical as we discover down below. Compared to Q4 2011, results are still significantly down, but this is again expected due to seasonal downturns. In Q4 they had $13.9 billion in gross revenue and $3.4 billion in net income with a gross margin of 64.5%.

Currently Intel is showing inventory at near historic lows, and this is due to a variety of factors. The PC market has been growing slower than expected due to the hard drive shortage that started last fall. Intel has adjusted manufacturing downward to account for this, and has worked to ramp 22 nm products faster by cutting back 32n production and converting those 32 nm lines. Intel is very aggressive with Ivy Bridge, and it expects 25% of all shipments in Q2 to be 22nm products. This is probably the fastest and most aggressive ramp that Intel has ever done, and it will continue to put AMD in a hole with their 32 nm production.

The second half of the year should see some significant growth on the PC side. The primary push will be the release of Windows 8 from Microsoft. This, combined with the near complete recovery of hard drive production, should push PC growth the record levels. Ultrabooks are an area that Intel is spending a lot of money to promote and develop with their partners. There are some 26 Ultrabook designs on record so far, and Intel expects this number to rise rapidly. The big push is to decline the overall price of Ultrabooks, as well as enabling touch functionality for a more affordable price. While not mentioned during the conference call, AMD is also pushing for ultra-thin notebooks, and once Trinity enabled products hit the street, we can expect a much more aggressive price war to be waged on these products.

Smart phones are another area that Intel is actively trying to expand into. This past quarter we saw the introduction of the Orange, Lava, and Lenovo phones based on the Medfield platform. So far these have been fairly well received by users and media alike, though the products have certainly had some teething issues. Intel still has a lot of work to do, but they finally realize the importance of this market. Intel expects that there will be 450 million smart phones shipped in 2012 (from all manufacturers), and that it is expected to grow up to 1 billion shipped a year by 2015/2016 (if not sooner). Intel wants to get into those phones, and is adjusting their Atom strategy to fit it. While in previous years Atom lagged behind other processor development from Intel, they are pushing it to the forefront. We can expect to see Atom based products being manufactured on 22 nm, and then aggressively pushed to 14 nm when that process node is available. Intel feels that they have a significant advantage in process technology that will directly impact their success in achieving higher rates of utilization across product lines in the mobile sector. If Intel can offer an Atom with similar performance and capabilities, tied with a significantly lower TDP, then they feel that a lot of phone manufacturers will look their way rather than use older/larger/more power hungry products from competitors.

Finally, Intel essentially has little interest in becoming a foundry for other partners. They are currently working with a handful of other countries to produce products for them, but I think that this might be a short term affair. Intel will either stay with a few partners to produce a low quantity of parts, or Intel will learn what they have to about producing products like FPGAs and eventually start producing chips of their own. When Intel fabs their own parts, they essentially get paid twice as compared to foundries or 3rd party semiconductor companies.

Intel continues to be profitable and successful. Ivy Bridge is going to be a very big product for Intel, and they are going to push it very hard through the rest of this year. Mobile strategies are coming to fruition and we see Intel getting their foot in the door with some major partners around the world. Servers, desktops, and notebook chips still comprise the vast majority of products that Intel ships, but mobile will become a much stronger player in the years to come. That is if Intel is able to execute effectively with accelerated Atom development on smaller process nodes. ARM is still a very worthy competitor, and a seemingly re-invigorated AMD could provide some better competition with Trinity and Brazos 2.0 in the notebook/tablet market.

Margins will be down next quarter due to the aggressive 22 nm ramp. With any new process there will be problems and certain inefficiencies at the beginning. As time passes, these issues will be resolved and throughput and yields will rise. Intel does expect a larger PC growth through the next quarter and a higher gross revenue. It will be interesting to see if Ultrabooks do in fact take off for Intel, or will competitors offer better price/performance for that particular market. Needless to say, things will not slow down through the rest of this year.